Quo Vadis Bitcoinium?
Market mapping with conflicting narratives in a narrative economy governed by market manipulation and squeezed by regulators
In the sense of Robert Shiller’s Narrative Economics, Bitcoin is a perfect example of a collection of narratives that form economic behavior of humans and thus the market movements of an asset. The narratives associated with Bitcoin are of a global jet-set, tech-driven, world-changing-for-the-better, (financial) sovereignty, anti-authoritarian rebellion and from rags to riches nature.
These are the overarching narratives that generate general buy-in and association with cryptocurrencies and BTC. Who would say no to such themes and not be associated with such a story?
But the narratives don’t stop there. Price movements on a daily, weekly, monthly and yearly basis are supposedly driven by other narratives. These stories often compete with each other. So, where does that leave us in a very unclear market situation? What can we expect from The Market going forward?
I will try to examine some of the fundamental narratives that are in conflict right now and see if there is a conclusion that can be drawn from it.
The fundamental narrative from a TA perspective
I will look into this narrative from a TA (technical analysis) angle and later from a purely FA (fundamental analysis) angle. In short, BTC has some underlying fundamentals that were programmed into its code. These are scarcity and deflation due to its 21m BTC maximum supply. Mining rewards are cut in half after each 4 year period.
The Halvening narrative: With each Halvening of blocksize rewards a reduction of new supply and thus a decrease in further dilution, increases demand and price.
Looking at the effects from said fundamentals one can spot repetitive patterns in the chart in regards to the halvening and try to project these into the future.
Halvening #1
Bearmarket retrace: -93%
Bear market low to post halvening top: 511 days
Price increase from low: ~12000%
Halvening #2
Bearmarket retrace: -85%
Bear market low to post halvening top: 1064 days
Price increase from low: ~12000%
Halvening #3
Bearmarket retrace: -84%
Bear market low to post halvening top: tbd
Price increase from low: tbd
If BTC was strictly operating by this paradigm a 12000% increase would put price at around 400.000USD/BTC. This then would eclipse the marketcap of gold. While purely technical there is some appeal to such a narrative. However, it remains to be seen if past Halvenings of which there are only 2! can be indicative of the strength of the upcoming move.
Furthermore: Is that a realistic scenario? Would people really buy BTC for 50k or 150k or even 400k USD per coin? Would regulators allow such price dynamics? Is an increase in marketcap to such an extent even plausible?
More details on this narrative can be found here and on twitter and tradingview as many others have picked it up. Unfortunately, I don’t know who the original author of this narrative is and I don’t remember where I came across it first.
The regulatory narrative
Regulation has been on the radar for BTC since two US senators demanded a crackdown on the Silk Road marketplace and an investigation into Bitcoin on June 8, 2011.
The regulatory regime has increased ever since. Introduction of KYC/AML to exchanges and disclosure of trading activities to tax authorities as in the case of Coinbase and others, or the barring of US traders on Bitfinex, OKEX, Binance, Bitmex and Huobi and the fragmentation of exchanges into US sub-exchanges in the case of Binance US and Huobi US are hallmarks of this development. Much of the regulatory pressure stems from nation-states wanting to gain access to taxable revenue thus fragmenting the global nature of the network.
On the flip-side, nation-states feel threatened by the developments. Therefore, the G20, G7 as well as the EU, US and several other nations have established task forces for Bitcoin and cryptocurrencies. In this light the regulatory intervention narrative has to be seen:
The regulatory narrative: Deflationary assets like gold and BTC are perceived as a risk to the US Dollar. Instead of outright banning BTC Futures have been introduced to permanently suppress price.
The reasoning and examination of the price suppression “cartel” can be found here in detail and here. The reasoning is that popular deflationary assets like Gold, Silver, Uranium and now BTC are being actively suppressed in price by powerful players (banks/governments).
Gold
Silver
Uranium
While the Uranium chart seems obvious, the Gold and especially Silver chart with its double top look far less intuitive for a price suppression narrative at first glance. What gives the BTC price suppression narrative some legs is the statement of ex CFTC chair Christoper Giancarlo:
“One of the untold stories of the past few years is that the CFTC, the Treasury, the SEC and the [National Economic Council] director at the time, Gary Cohn, believed that the launch of bitcoin futures would have the impact of popping the bitcoin bubble. And it worked.”
This could be of course a regulator claiming control on a mere coincidence or due to an unrelated cause. However, he points to research by the Federal Reserve who also supports that narrative. They also conclude that as speculative dynamics disappear from BTC the transactional dynamics (utility) would be price determinants.
Bitcoin
The mining narrative (FA)
Bitcoin has production costs like traditional assets like gold. If price is being actively suppressed as insinuated by some, one would assume that the suppression won’t undercut production cost (at least not for long periods of time).
In the case of Gold, there is an article by seekingalpha that explains the relationship between market price and production costs.
Looking at the longterm Gold chart we indeed one sees that price hovers around production cost on average. Currently, Gold production costs hover around 1200USD. There are counter-arguments to the theory that gold is being actively suppressed. Might it be that gold price is just a function of market dynamics pricing its value close to its production costs? Satoshi refers to this when he said:
“the price of any commodity tends to gravitate toward the production cost”
No matter if suppressed or not price should find the production costs as the lowest boundary. Of course, I’m not the first one to mention that and you can find indicators on Tradingview calculating mining profitability. One is the Puell Multiple another the Bchain/Mirev.
These calculations of mining profitability depend on hashrate, difficulty level, and costs.
The previous cycle low of 3100USD/BTC likely coincides with the lowest break even point for miners. Since many miners had higher break even points hash power drastically decreased during the bear market low.
When price increased back up from the low the hashrate did not react immediately but with a lag.
In general, one can say that miners need a price increase in order to increase the hashrate while at the same time the mining difficulty of the network increases. That said, supply of mining resources (harshrate) is very flexible. Miners with the lowest cost basis can sustain operations during market lows while others are forced to switch their equipment off. Miners can run hardware for a while below their cost basis and/or switch it back on once the market recovers above their cost basis which makes it a rather flexible supply.
If production costs are the floor of price then this leads us our next narrative:
The Mining narrative: Miners need to offset their operation costs by selling BTC. Price won’t undercut the production costs. With a halvening in block rewards the production cost will roughly double.
Or in other words: Would the Halvening affect the base production price — in essence doubling it? The short answer is, yes. Even though assumed efficiency increases would put the production costs at a little less than double the current costs.
A friend of mine developed a model for the equilibrium costs of BTC in regards to production costs and hashrate. As hashrate and price fluctuate there can’t be a clear prediction but if you put the following assumptions in the model one can see that production price doubles which might give an indication of a new price floor at given hashrate after the halvening as well as a price floor under current conditions.
One can see how much a difference in hashrate affects the equilibrium price of BTC. Of course, the hashrate is a constant flux therefore a fixed price projection is almost impossible.
We have seen a very recent jump in hashrate from 80mTH/s to 100m TH/s. Some see this as an argument that this current increase in hashrate might signal a coming increase in price. Even though historically it rather seems that hashrate follows price, especially in a price drop and then lags in recovery after a bear market price floor. You can find more on mining profitability here and here as well as the interrelations between hashrate, network security, and profitability here.
The institutional narrative
With the brutal and lasting bear market, an odd phenomenon has spread in cryptocurrency speculators circles. People started to hope, pray and FOMO in for institutional buy-in into the markets.
The institutional narrative: When big banks, pension funds and hedgefunds finally enter the market, Bitcoin will soar.
Oddly enough this institutional narrative is often at odds with the underlying values of what BTC and other cryptocurrencies and its true believers are said to be here for: to disrupt these very institutions. Now they are summoned to save the underwater positions of unsophisticated retail traders?
While it is true that new custody solutions, exchange onramps, and derivative products pave the way for institutional investors it remains to be seen if that is a net positive for price. The counter-narrative would be the regulatory narrative that claims that institutional futures popped the 20k USD bubble and are set out to suppress price ad infinitum.
With more products and extremely sophisticated players with almost infinitely deep pockets and brainpower entering a relative thin liquidity market - things are becoming quite interesting but certainly not less complex and easier for retail traders.
Conclusions
The question now is: What do we make of this? Which narrative will win?
We are looking at a phenomenon that is still quite new and unusual. We are still standing at a frontier looking at an unknown with few data points to cast a really strong prediction. After all, how can anybody know with certainty with this wild mix of global interaction and interests of all kinds?
While the fundamentals on mining, production cost, Halvening, and hashrate are quite solid it still remains unclear to me how much regulatory pressure and possible price suppression tactics might cripple these underlying fundamentals. After all, it’s about power and control and nation-states won’t just give up their predominant power functions in regards to control and currency issuance.
I’m curious to see what the response of the global community of nation-states and central banks will be should BTC move into another hyper-growth cycle after the next halvening.
Additionally, the first two halvenings played out in a much more immature climate in regards to adoption and global awareness. With more players at the table, the market becomes more complex and harder to predict. Patterns and cycles may shift significantly from previous cycles.
That said, I would assume if BTC stays around that the mining fundamentals form a price floor after the next halvening in relation to the hashrate somewhere between 10k-20k USD. However, while quite exciting, I have a hard time imagining a 12,000% price increase from a TA perspective for the next cycle.
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